No Rubber Stamp for Lehman Executives’ Settlement

By Jonathan Stempel | May 4, 2012

With a nod to country singer Kenny Rogers, a federal judge has refused for now to allow insurers for former officers and directors of Lehman Brothers Holdings Inc to pay $90 million to settle a fraud lawsuit brought by investors.

U.S. District Judge Lewis Kaplan in Manhattan on Thursday directed five former officers of the investment bank, including Chief Executive Richard Fuld, to file financial paperwork by May 10 to help him decide whether the settlement is fair.

Kaplan will review not only whether their combined liquid net worth is less than $100 million, as a mediator had found, but also whether they have other assets that could be tapped to help former Lehman investors recoup their losses on tens of billions of dollars of securities.

“Without knowing whether and to what extent these defendants could withstand a judgment in excess of the insurance money now on the table, the court would be severely handicapped in coming to an informed view on the question before it,” Kaplan wrote.

The judge quoted Rogers’ signature song “The Gambler” to explain his decision.

“You ‘got to know when to hold ’em’ by pressing on with a lawsuit, ‘know when to fold ’em’ by taking the best settlement you think you can get, and know ‘when to walk away’ by dropping an unpromising case,” he wrote.

But in class-action litigation, “the named plaintiffs and the lawyers for the class do not have the same right to make those decisions,” he said. “(The court) is obliged to be properly informed before approving a class-action settlement.”

Other onetime Lehman officers subject to the order are former president Joseph Gregory, former chief risk officer Christopher O’Meara and two former chief financial officers, Erin Callan and Ian Lowitt.

If Kaplan approves the settlement, then these officers and nine directors also covered by insurance would pay nothing to settle, yet be released from the investors’ claims.

Israel David, a lawyer for Gregory, declined to comment. Lawyers for the other officer defendants did not immediately return calls seeking comment.

In recent years, a growing number of federal judges has refused to approve settlements because of a lack of information about their fairness.

For example, Kaplan’s colleague Jed Rakoff in November voided a $285 million fraud settlement between the U.S. Securities and Exchange Commission and Citigroup Inc. That decision is being appealed.

In the Lehman case, the investors’ lawyers, mindful of a possible “public hue and cry” from letting Lehman officers off the hook, hired former federal judge John Martin to determine the officers’ liquid net worth. Martin, the mediator, found that this sum was “substantially less” than $100 million.

Kaplan called his former colleague “highly respected” and the conclusion “no doubt well considered and correct,” but said the review did not take into account other assets. This, Kaplan said, required that he take a closer look.

“There is no sound reason why the information that has already been provided to Judge Martin should not be provided to the court (in confidence),” Kaplan wrote.

Lehman filed for bankruptcy protection on Sept. 15, 2008, in what became a major trigger of that year’s global financial crisis. It emerged from Chapter 11 in March.

The case is In re: Lehman Brothers Securities and ERISA Litigation, U.S. District Court, Southern District of New York, No. 08-05523.

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